Mr Lang said he selects companies based on situations where management is either constrained or where the business is too strong to break, while he also avoids meeting with managers so he can judge the firm by observable facts.
He also said he thinks investors are prone to ‘over-reaction’, meaning they place too much weight on a narrow range of information to draw black and white conclusions.
“We look for signs that investors are focusing on old traumas that are no longer relevant.”
However, the Ardevora partner said analysts are prone to ‘under-reaction’ and are often over-confident about their forecasting ability and resistant to information that contradicts their views.
“We look for situations where analysts are struggling to understand a company, which are often growth companies,” Mr Lang said.
Alex Wright, who runs Fidelity’s £2.9bn Special Situations fund, admitted he only gets his conviction calls right 55 per cent of the time.
But he said the structure of the fund means that when he gets it wrong those underperforming stocks only make up a small part.
The Fidelity fund manager, who adopts a contrarian strategy by investing in ‘unloved’ stocks, said he uses a master spreadsheet which has the thesis for all the stocks, with an upside and downside target price.
“When there are massive movements in the market, I find this spreadsheet very useful to go back and cross-check it with my thoughts when I bought it,” he said, adding he can establish whether those views are still valid today.
“If a stock falls, the key question is whether I should buy some more or sell it?
“I would tend to buy more if the balance sheet is still strong, the downside protection is still there, and it’s just short-term trading which has affected the current profits.”
However, Nick Train, who manages the £3.1bn Lindsell Train UK Equity fund and the £2.1bn Global Equity fund, told FTAdviser he takes a completely different stance.
“We invest in a very emotional way; we fall head over heels in love with the companies we are invested in.
“When we really love a business it’s great to own it and buy more, but the best thing is to buy more when the price is down, and I would hope we have the luck or the discipline to be able to buy more when the share price has been weak."
While he said strategies that avoid emotional bias can be very successful, he argued this approach assumes the investor does not care what they are invested in and is purely focused on whether the shares are too low or too high.
“This approach is totally valid, but it’s just not the way we do things.”